On the relationship between investor sentiment, vix and trading volume

Abstract

As noise traders affect stock market by trading, sentiment, as a signal of noise, may have relationships with trading volume. This paper explores the effect of sentiment on the stock mark et's trading volume. Increase in Volatility Index (VIX) can explain the percentage increase in trading volume, but only in high VIX period. Besides, higher level of VIX is likely to be associated with greater variability of trading volume. The noise traders add liquidity to the market and provide more chances for investors to time their trade as the volatility of liquidity increases. These two kinds of impact lower rational investors' required return. The noise traders not only drive the price deviating from fundamental value, but also influence the liquidity dimensions.